Tuesday, August 13, 2013

Batten Down the Hatches!

Poland:
An EU success story hits troubled times

Poland,
the only member of the European Union that managed to maintain
uninterrupted economic growth during the ongoing European crisis, has
recently entered a phase of political fragility. As the Polish
economy has begun to feel the impact of the EU crisis, the popularity
of Polish Prime Minister Donald Tusk and his party, Civic Platform,
has declined. These changes mean Poland is becoming more like its
Central European neighbors.

Analysis

Poland
has been one of Europe's most glittering success stories, both before
and during the European crisis. Between 2003 and 2007, the Polish
economy grew an average of 5.2 percent annually. Even as the crisis
hit Western Europe, Poland managed to grow by 4.5 percent in 2011 and
1.9 percent in 2012. However, the country's economy has recently
decelerated. Poland's gross domestic product grew by a meager 0.4
percent in the first quarter of 2013, and the country is expected to
grow around 1 percent this year, well below its previous performance.

A
combination of factors explains this shift. Warsaw's recent spending
cuts and tax hikes have weakened local consumer confidence and
companies are finding it increasingly difficult to secure financing.
Additionally, the Polish government has already spent most of the EU
funds allocated for 2007-2013; fresh money will not arrive until
2014. Between 2008 and 2012, Poland also benefited from extra
investment related to the Euro 2012 soccer championship – according
to Capital Economics, Poland received some 25 billion euros (roughly
$32.7 billion) of investment related to the championship, which also
created several thousand extra jobs.

These
factors are taking their toll on employment. According to Poland's
Central Statistical Office, unemployment was 13.2 percent in June, up
from 12.4 percent in the same month during 2012. According to
Eurostat, youth unemployment currently affects one-third of the
active population aged between 15 and 24. While Poland's unemployment
is lower than that of most Southern European countries, it is
beginning to have political consequences.

Mr
Tusk came to power as the head of the centrist Civic Platform party
in 2007. He was re-elected in 2011, making him one of the few prime
ministers of EU member states to survive the European crisis and
remain in office. Now, the slowing Polish economy is eroding support
for him and his party.

Mr
Tusk is facing challenges from within and from without. According to
a July 9 opinion poll, 55 percent of Poles want the prime minister to
resign. Moreover, the conservative Law and Justice party has recently
become Poland's most popular party, with opinion polls showing
between 30 and 35 percent of support for it (some 10 points above
Civic Platform). Law and Justice, led by former Prime Minister
Jarosław
Kaczyński, has been increasing its nationalist rhetoric, defending a
larger presence of the Polish state and Polish investors in key
sectors of the economy, such as industry and banks, and proposing to
raise the minimum wage and cut taxes.

The
party also has a negative view of the euro zone, arguing that Poland
should not abandon the złoty in the short term and that a referendum
should be held before joining Europe's currency union. In February,
Law and Justice voted against the fiscal compact treaty, an EU
agreement that expands EU oversight of national budgets. According to
Mr Kaczyński, the pact undermines Poland's sovereignty.

Mr
Kaczyński led a fragile coalition government that lasted for a year
and a half between 2006 and 2007. Since then, Mr Tusk has warned of
the political instability that he says would follow a new Kaczyński
government, so as to maintain support from Poland's middle and upper
classes, who fear the rise of the nationalists. But the economic
crisis has weakened these classes' trust in Mr Tusk, and Law and
Justice is becoming particularly popular among young voters, who have
been hit especially hard by the slowing Polish economy.

Adding
to Mr Tusk's woes, his own party is also challenging him. In May,
Jarosław Gowin (who was dismissed as justice minister earlier in the
year) openly questioned Mr Tusk's leadership of Civic Platform and
criticized the government for rising taxes and increasing
bureaucracy. The party was originally scheduled to hold its
leadership elections in spring of 2014, but Mr Tusk decided to move
the date forward to avoid a deepening of the Civic Platform's
internal crisis. As a result, party members will vote for a new
leader this summer, with results announced in late August.

Though
Mr Tusk is likely to be re-elected as party leader, that will not
mend the divisions within Civic Platform. In June, Mr Gowin created a
parliamentary group called "Good Changes" to promote his
agenda. While this does not necessarily mean a split in Civic
Platform is imminent, internal tensions are likely to grow in the
coming months. If Mr Gowin and his supporters abandon the party, the
ruling coalition (made up of the Civic Platform and its junior
partner, the Polish People's Party) could lose its majority in
parliament, becoming a minority government and risking early
elections. Mr Tusk will face his next challenge in May 2014, when the
Poles will vote in European parliamentary elections. This will be a
key test for the popularity of his party, and will set the political
tone for the next general elections, scheduled for 2015.

Since
joining the European Union in 2004, Poland has enjoyed a great degree
of political stability, allowing it to attract investments and
maintain high levels of economic growth. This was also the case for
most countries in Central and Eastern Europe, which managed to remain
relatively isolated from the crisis in the euro zone However, a
combination of economic deceleration and internal political issues is
creating instability in the region.

The
Czech Republic has been in a delicate political situation since early
June, when its government collapsed after a corruption scandal
involving a close aide of former Prime Minister Petr Necas. The Czech
president recently appointed a new prime minister, but political
instability persists and the new cabinet will probably be
short-lived. Bulgaria has also been mired in a political crisis since
the government of former Prime Minister Boyko Borisov fell in
February and was replaced by a fragile government led by current
Prime Minister Plamen Oresharski.

The
Hungarian government is considerably more solid than its Czech and
Bulgarian counterparts, but Hungary's gross domestic product
contracted by 1.7 percent in 2012, and according to the European
Commission, will only expand by 0.2 percent this year. To increase
state revenue, Budapest has applied several economic measures (such
as one-off taxes) and institutional reforms that are upsetting
foreign investors and the EU Commission.

Economic
slowdowns are also leading countries in the region to re-examine
their relationships with the European Union. Mr Tusk said July 6 that
Poland probably would not join the euro zone until at least 2019.
Czech National Bank governor Miroslav Singer said in May that his
country is unlikely to adopt the euro before 2019, while Hungarian
Prime Minister Viktor Orban said in March that Budapest would not
join the common currency before 2020.

For
all these countries, keeping their own currency offers some room for
maneuvering in the context of the European crisis. But it also poses
the risk of isolation from EU decision-making. Central and Eastern
European countries still depend on EU funds to help their economies,
and a seat at the negotiation table is key to protecting their
interests. They also benefit from access to the free trade zone in
Europe. But as membership in the European Union – and particularly
the euro zone – becomes less attractive, countries in the region
are reassessing their priorities, particularly in light of the growth
of nationalist parties that demand greater independence in foreign
policy issues. This dilemma will continue to mark the region in the
coming years.

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